7 Important Factors That Affect Your Housing Loan Interest Rate


For long term financial commitments like housing loans, interest rates demand particular attention. Even a slight increase in the home loan interest rate can result in a substantial increase in the financial burden. Similarly, lower interest rates decrease monthly outgo, helping to foster easier repayments and significant savings over the loan tenor.

Moreover, factors like RBI’s liquidity boost to the market amid global economic turbulence has created an opportune moment for homebuyers. Rising affordability of properties indicates that the real estate market will likely see a rise in sales in the coming months. According to the latest MagicBricks PropIndex Report for Q1 2021,

  • Demand for the country’s residential real estate witnessed an 8% growth on pan-India level.

Intending homebuyers should be thoroughly acquainted with the following factors that influence the latest home loan rates to maximise savings on the purchase of their dream house.

7 Crucial factors affecting home loan interest rates

  1. Credit report and CIBIL score

Credit score is one of the most important factors that affect home loan interest rates. When applying for a home loan, the financial institution will determine the applicant’s creditworthiness and repayment behaviour using their credit report. In India, most lenders use the credit report issued by TransUnion CIBIL, where a benchmark score of 750 or above is considered the mark of responsible borrowing.

Undertake efforts to improve your CIBIL score and take it above 750 to negotiate for the lowest housing loan interest rates.

  1. Type of interest

Lenders offer two types of interest rates on a home loan, i.e., fixed-rate and floating rate home loans. As the name suggests, fixed rates do not change with market fluctuations throughout the loan tenor, while floating rates change depending on the linked external benchmark.

Fixed rates are a better choice if the market rates are expected to increase in a volatile environment. On the other hand, floating rates are better if trends indicate liquidity boost and falling market rates.

Also, floating rates are cheaper than fixed ones by at least 1-2%.

  1. Existing lending benchmarks

In an October 2019 press release, RBI mandated all new floating rate loans to be linked to an external benchmark. While financial institutions are free to choose any benchmark issued by the Financial Benchmarks India Pvt Ltd (FBIL), most lenders use RBI’s repo rate to decide their lending rate.

Any change in these external benchmarks will significantly impact home loan interest rates. For instance, RBI’s decision to keep repo and reverse repo rates unchanged since May 2020 led to significantly low interest rates, which created favourable buying conditions in the real estate sector.

  1. Applicant’s income and employment nature

Financiers also consider the applicant’s repayment capacity when deciding housing loan interest rates. Typically, interest rates offered to salaried individuals is slightly lower than the ones provided to self-employed individuals.

This is primarily due to a notion that a salaried applicant’s income (and hence, repayment capability) remain stable until retirement. On the other hand, business income fluctuates based on external factors.

  1. Loan amount

Generally, lenders do not extend 100% of a property’s value as a home loan. The loan to value ratio (LTV) is usually between 70-80%, and the remaining amount must be arranged as a down payment.

Experts advise against availing a higher loan value, and this increases the interest rate. Some lenders have slabs according to which the interest rate changes. Use a home loan EMI calculator to estimate the monthly outgo for a specified principal and interest rate.

  1. Government subsidies

In Union Budget 2021, the honourable Finance Minister announced additional tax deductions and holidays for affordable properties under the Pradhan Mantri Awas Yojana. Applicants looking for a home loan for such properties are also eligible for special concessions and discounts. Chat with the builder and your preferred lender for more details on reduced home loan interest rates.

Also, look for pre-approved offers extended by HFCs to make availing loans faster and simpler. These offers are available on various financial products, including home loans, loans against property, etc. Check your pre-approved offer by providing your name and contact number.

  1. Location and property value

Properties located in prime areas with ample facilities have a better resale value. Such properties hold a better prospect for financiers, who can regain any defaulted loan amount by auctioning the house. Hence, interest rates for such well-connected properties are usually lower compared to properties in backward areas.

Apart from these, applicants should also keep a close eye on home loan eligibility factors that they must fulfil to avail a loan. Also, include the loan’s features and benefits, compare market rates, and only settle on favourable terms.

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